Conservative investors always long for extra returns with no risks attached. They weigh every bit of interest that they can earn more from an investment. And every penny saved on taxes is the icing on the cake.
However, these days investors are facing a dilemma. Though interest rates in India are rising, rates on fixed deposits are not keeping pace. The increased cost of living is another problem that most risk-averse investors have to deal with. No wonder, fixed-income investors are trying to find out ways to boost returns.
Those investors who are not content with guaranteed returns are putting money in mutual fund schemes while those with no appetite for interest rate risks are reaching out for fixed maturity plans (FMPs)). Meanwhile, investors who want a 'coupon' or a defined return are opting for company fixed deposits. Such investors now have another option — non-convertible debentures.
What is an NCD?: A non-convertible debenture is a fixed income instrument where the issuer agrees to pay a fixed rate of interest to the investor. The fixed-income instrument cannot be converted into equity of the issuing company and is very different from convertible debentures which can be converted into equity of the issuing company.
There are two types of debentures – secured and unsecured. The debentures with a "charge" on the assets of the issuer are called secured debentures. Put simply, in case of a default by the issuer, the secured debenture holders are paid by selling the assets against which the charge was created. Given the security, you get a lower rate of interest on secured NCDs than their unsecured counterparts.
When it comes to NCDs, you may choose from various options, depending upon your needs. If you are someone who's looking for a regular flow of income, you will be better off looking for instruments that pay interest at regular intervals. If you are keen to invest for a longer term, go for the cumulative option where you are paid the interest at the end of a fixed tenure.
Safety: Investors looking for higher safety can look at secured NCDs. They are a far better option than company fixed deposits, given the charge on the assets of issuer. Of course, you can always consider investing in non-secured debentures to earn extra returns. NCDs are rated by credit rating agencies. Ratings are even more important when it comes to non-secured debentures.
Liquidity: In the past couple of years, investors have seen NCD issuances from Tata Capital, Shriram Transport Finance and Larsen & Toubro Finance that are listed on the National Stock Exchange. Some of the instruments are fairly liquid, offering a smooth entry and exit to the retail investors.
"Though listing on the stock exchanges aims at providing liquidity, it does not guarantee it," points out an investment banker involved in a listed NCD issuance. It is better to have a look at the trading history of an individual instrument. An instrument that enjoys good liquidity till date may not remain liquid in future. But experts prefer NCDs over company fixed deposits where the investors are absolutely at the mercy of the deposit-accepting company for premature withdrawal of their money.
Best Regards
Prakash Nair
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